FHA Credit Score Guidelines And How It Impacts Down Payment

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This BLOG On FHA Credit Score Guidelines And How It Impacts Down Payment Was PUBLISHED On April 30th, 2019

FHA Loans are the most popular loan program in the United States.

In this blog, we will discuss FHA Credit Score Guidelines and the hurdles borrowers face with lower credit scores.

FHA Credit Score Guidelines Versus Agency Overlays

What is the minimum credit score needed to qualify for FHA Home Loans?

  • The straight answer is borrowers can qualify for FHA Loans with credit scores down to 500 FICO
  • However, borrowers with under 580 credit scores need to put 10% down payment on a home purchase
  • Borrowers can put 3.5% down payment and qualify but need a minimum of a 580 credit score
  • Unfortunately, the above FHA Credit Score Guidelines are HUD Agency Guidelines
  • Lenders can have higher credit score requirements than FHA Credit Score Guidelines
  • These higher lending requirements mandated by individual lenders on top of FHA Guidelines are called lender overlays
  • Let’s take a case scenario
  • Even though FHA Credit Score Guidelines is 580 FICO for a 3.5% down payment home purchase loan, a lender may require a 620 FICO as part of their overlays
  • Most banks have FHA Credit Score overlays where the minimum credit score required to qualify for an FHA Loan with them is 640 FICO

Therefore, not all lenders have the same FHA Credit Score requirements. Gustan Cho Associates at Loan Cabin Inc. is a national five-star direct lender with no overlays on government and conventional loans.

Importance Of Credit Scores 

Credit scores play an important part in FHA Loans.

  • As mentioned earlier, lower credit scores under 580 FICO will require higher down payment versus credit scores of over 580
  • Another role credit scores play in FHA Loans is pricing adjustments
  • Borrowers with under 640 FICO will get pricing adjustment hits
  • This means higher mortgage rates. Lenders consider lower credit score borrowers as high-risk borrowers
  • Therefore, lower credit score borrowers will get a pricing hit which means higher mortgage rates
  • Borrowers with under 600 FICO may even need to pay discount points

Borrowers with 500 FICO will definitely get higher mortgage rates PLUS pay discount points.

Manual Underwriting And Compensating Factors

FHA and VA Loans are the only two loan programs that allow manual underwriting. Compensating Factors is very important on manual underwrites with higher debt to income ratios. Borrowers in a current Chapter 13 Bankruptcy Repayment Plan can qualify for both FHA and/or VA Loans via manual underwriting with Trustee Approval. There are no waiting period requirements to qualify for FHA and/or VA Loans after Chapter 13 Bankruptcy discharge date. However, any bankruptcies with less than 2 years seasoning after discharge date need to be manually underwritten. DTI is reduced on manual underwriting files. Maximum DTI with no compensating factors on FHA Loans is 31% front end and 43% back end. Debt to income ratio caps may be increased on manually underwritten FHA/VA Loans with compensating factors.

Here is the FHA Compensating Factors Chart:

Standard DTI ratio limit: 31/43

Accept a DTI ratio of 33/45: Have at least one of the following factors

  • Finance an energy efficient home.

Accept a DTI ratio of 37/47: Have at least one of the following factors

  • Verified and documented cash reserves.
  • Minimal increase in housing payment created by the new mortgage, either $100 or 5% increase, whichever is less.
  • Significant additional income from such sources as overtime, bonuses, part-time work or seasonal employment.

Accept a DTI ratio of  40/40: Have at least one of the following factors

  • Have no discretionary debt such as auto loan payments, student debt or required credit card payments.

Accept a DTI ratio of 40/50: Have at least two of the four factors below.

  • Verified and documented cash reserves.
  • Minimal increase in housing payment created by the new mortgage, either $100 or 5% increase, whichever is less.
  • Significant additional income from such sources as overtime, bonuses, part-time work or seasonal employment.
  • A strong residual income, essentially how much cash is left over each month after basic expenses.

Qualifying For FHA Loans With A Direct Lender With No Overlays

Most lenders have lender overlays. Only a few lenders can do FHA Loans with credit scores under 580 FICO. Gustan Cho Associates at Loan Cabin Inc. are direct lenders with no overlays on government and conventional loans. We have helped countless of borrowers with under 580 FICO qualify for FHA Loans. If you are looking for a direct lender with no overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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